The much anticipated pullback is finally under way, but the market has also been showing it has some strength left. Just how much strength can be mustered will have a lot to do about earnings meeting big expectations.
This earnings season, if it’s good, it’s just OK. If it’s OK, it’s bad. And if it’s bad, it’s quickly taken outside behind the woodshed. Only a great earnings report coupled with good guidance seems to be good.
In an environment like this, and with the extended market, disappointments are taken hard. The S&P 500 had its first down week in eight weeks last week.
So is this pullback another buying opportunity? Every drop before this one during the past couple years has caught a bid and quiickly resumed the uptrend. It would be an easier guess if we did not have earnings season, the State of the Union Address, and the FOMC announcement to consider. There are a lot of headline type events and news this week that can derail a trending stock. For that reason many traders will just bid out their time and see which way the wind is blowing afterwards.
The last article pointed out several Colorado stocks and their pullback status. From the comments that were made on each one, only a few of them were worth watching as buy candidates. It is hoped you took a look at these as the point of these articles is to help readers trade better; and not just comment on the markets as you can get that any number of places. Seeing through those other stories, especially those of the general press; and instead having your own opinion that you can trust is paramount to your being a consistent trader or investor. There is some real beef (sorry Taco Bell) in these two articles for those who want to trade better. If you want to eliminate at least the silly common mistakes and move beyond luck read these two articles together. ‘Luck’ is not a strategy in trading.
So far the comments on each of those Colorado stocks is holding true. Most are still falling, LBTYA is pulling back after a run, and DVA broke out and scooted up quickly. If you take some time to study the educational articles that have been brought together here, you will see this is not all that hard to do. No, you won’t be right all the time, and when your not right you wil have pre determined limit to your loss; but you can be right most of the time, and when your right you can make more money than you lose when you lose. That is good trading.
So we can see many stocks that are pulling back from their highs. Today how to buy a stock that is pulling back wil be discussed. If you listen to CNBC or Bloomberg News you will hear many guest analysts say the stock they are talking about ‘should be bought on pullbacks’. What they are saying is not to buy it after a several bar run up. A good trader does not enter a stock just before a pullback isd emminent. After 3 to 5 days up a trader should let a stock pullback before buying it. (Yes, even if it goes up another day or two!) If reading these articles do anything for you, this tip could save you big time. Buying on pullbacks is just a more professional way of entering a stock which allows for less risk and more profit. (Take a lok at LBTYA from yesterdays list as a minor example, and DVA today. How many novices do you think got excited at DVA’s move today and jumped in after “they were sure” after watching that was going up up up, but instead they ended down $1.)
Getting in on the beginning of a move is far more profitable than buying at a high and then having to sit through a pullback right away – some of which may not become a quality pull back as the stock continues to trade and thus hits your stop for a loss. The link in the previous sentence will show an exact professional buying point that can be used with any stock in any pullback. Yes, there is way to buy a stock with not only less risk of it falling from there, and less money lost if you do lose; but also (and this is important) a way to know exactly how much you will lose if you lose. Does that sound appealing? I hope so. Take a mental look at your last losses or any stock you own now that is loseing. Do you know how much you wll lose? If not your not trading professionally. By definition you’re the novice the pros are exploiting. Sorry to let you know that but don’t blame them; if your doing that you’re a willing party.
Buying after a pullback is referred to as a ‘buy set up’. The reason this has this name is two fold: It means simply buying after a stock price corrects for a better price; but also it distinquishes between pullbacks that can be bought and pullbacks that should not be. Not every pullback is a buy set up. This article will cover issues that will help you distinquish between the two. You should be able to see the differences in the Colorado stocks listed in yesterdays article just by viewing their charts without reading my comments. It takes less than a second to parse each of them out.
You may have heard of some names that describe various types of pullbacks: Flags, descending triangles, pennants, inside 123’s, and such. It is really not important to memorize the names of these; in fact, that can send you down a false path of confidence; but it is important to recognize what is basically going on and the message they send.
Basically patterns come in two actionable camps. Continuation and reversal patterns. (It is also important to state that the majority of patterns are neither – that means most charts you look at at any given time are not buyable at the time. You could think about this as a cake that is still baking.) This is a good thing as it narrows down what you want to be watching. You can amke a list of thsoe stocks that are pulling back with good attributes (and any other factors you want to use), and simply wacth them and the general market for a buy point. If they start to pullback to far or to fast just take them off your list.
Buy set ups are continuation patterns by definition as they continue the trend. Not recognizing the trend is a big cause of losses among novices as they get on the wrong side of it.
In case you are wondering about the reversal patterns, they are as you might guess the opposite and reverse the trend rather than continue it. If you have ever bought a stock that went south on you and then just kept going down maybe even faster, you should go back and look at it to see if this concept applies. It likey does. Some reversal patterns include double tops, island reversals, climatics, head and shoulders, and even failed continuation patterns. But again memorizing these names is not as important as recognizing what is going on.
When stocks start to pullback with the general market during an uptrend it is still considered healthy. Various traders that are trading various set ups in various time frames will take profits after an advance has run so far. The first thing to take note of in a pullback is to see that it does not pullback too far. If it pulls back to the point of a possible trend change then it would not be considered a continuation pattern anymore. If it has less chance to continue the trend, then you won’t be buying it so it comes off your watch list.
So here are several rules a trader may have in their trading plan that controls which pull backs may be bought:
- The pullback does not go beyond 50% of the immediate prior uptrend.
- It is a best for the stock to pull back to some level of support. This can help reduce risk of the stock falling further after you enter.
- The best pullbacks are ones that form a smooth controlled path down and do not move in a choppy fashion. Should congestion be created on the way down it can make it that much harder for the stock to get past it when it reverses and heads back up.
- Many of the best pullbacks fall 3 to 5 bars in your time frame. If you take a look at several charts (any stocks you choose, any time frame you trade), you will notice a tendancy for many stocks to run 3-5 bars or so in one direction before reversing. This revelation can be a real ‘aha’ moment.
- Many of the best pullbacks do so around a 45 degree angle. If it pulls back too sharply it can be revealing sellers are too aggressive.
- Pullbacks should pull back do so from a ‘single point’. For example, a single candlestick bar or topping tail (provided it is not big). Pullbacks that start from a ’rounded’ or ‘square’ top should be avoided. Congestion like this represents more resistance for the stock to have to get through to go on to new highs.
- Volume should generally be less than the previous advance from which it is pulling back from. This can show most holders of the stock are not selling and wanting to hold on to the stock despite some selling by others.
So consider that you have found a good qualifying pullback on a stock you think you would like to buy. So when do you pull the trigger? How do you know when is the optimal time?
Most traders will want the stock to move a little in the direction of their trade to help confirm it is reversing and rejoining the trend. A good place to enter is when the price overcomes a previous candestick bar after a 3 to 5 bar pull back. There is a little resistance at the ends of each candlestick bar and overcoming that is a sign the stock may be starting to move. The general market must be watched also as to its trend. (75-80% of stocks move in the direction of the general market.)
- Another place to watch for a stock that may be starting to move back up is a slowing of momentum in the pullback. A narrow range bar (small bar) in relation to other larger bars in the pullback can help signal that downward momenum is waning.
- If it slows at a support level this is best. (If it plows right through an obvious support level then it should be avoided. (That case above where a stock goes south on you and then speeds up is from situitions just like this as every knowledgeablke trader bails out and the short sellers pile in.)
- Volume should accompany the reversal when it starts to go back up with the trend again. This shows traders have a healthy demand for it again after the pullback.
Overall the pullback should have a smooth rhythm within the whole advance of the stock. Remmember you are trying to take some profit out of ‘the middle’ and not trying to pick tops and bottoms. (Don’t predict and forget about perfection.) Again, understanding what is gong on is far more important than trying to optimize any scientific elements of your set up or blindly trading on names of stuff that you memorized. Often the preponderance of your set up rules will still produce a very nice trade in a supportive market environment.
One caveat: Do no buy pullbacks in a down trending market. (That would be agaisnt the trend right?) Continuation patterns have a poor record of success when traders try to fight the trend. This is why so much emphasis has to be placed on the trend and to knowing when the trend is in question or has changed. If you read this article and the above link on “getting in on the beggining of a move” you will understand how powerful and profitable catching a stock when the market and stock trend has just changed. It can change you whole outlook and the way you look at the market.
Trade with a plan.
(20% off when you enter “treasure305”)